How do you tax the residents of a virtual world? By Mark Simpson
Mark Simpson tax planning director of chartered accountants Simpson Burgess Nash explores the challenging issues surrounding taxing profits made in virtual worlds.
Over the last year a joint economic committee (JEC) of the US Congress has been investigating the issues of taxing enterprises that exist simply on a server.
Continued...
The full article is available to registered AccountingWEB members only. To read the rest of this article you’ll need to login or register.
Registration is FREE and allows you to view all content, ask questions, comment and much more.
Or if you are already registered, login here
Not so complicated
I've already done interviews on this question.
The answer is simple: virtual worlds are just trading mechanisms, no more and no less. They just happen to involve currencies created by people other than governments and the trading takes place under what may often be artificial names in what looks like an artificial place. What's new? This is the tax haven world of front companies that are deemed to have no residence, after all.
Those names are, however, in the case of virtual worlds identifiable by the provider of that space and the location of that space can also be identified. It is where the server is. Exchange rates can be established, and are. In that case accounts can be attributed to owners and information requests can be made of the owner of that artificial space for that data to be supplied. Put bluntly, the owners are acting as banks by any other name.
Banks are regulated, world wide. So should these owners be so: if not they become the facilitators of money laundering mechanisms at the very least. Once that is established the duty to supply information becomes key. If they choose to operate in locations where information is not exchanged then this comes a simple assault by these facilities (and the governments that allow this to happen) on the financial establishment of the major nations of the world. Action to counter that would have to be taken. This is not impossible.
As for the taxation of the transactions: these transactions take place at the point where control of the transaction is located i.e. where the mouse is clicked. This is a well known concept: it is found in much corporate tax law world wide. In that context if the mouse that controls the transaction is in the UK then that's where the tax is due, that's where the capital gain arises and that's where the estate is located.
How do you prove that? Only by proving the location of the account. So we're back to proper know your client rules required of any financial establishment.
I see no other way forward.
And for Rebecca's comment on what are called LETS schemes (Local Exchange Trading Systems) (see http://www.letslinkuk.net/) agreements on such schemes have been negotiated with the Revenue.
A similar theme
Nowhere near as complex, but some years ago I heard that my local tax office was interested in our local "alternative" economy. Stroud in Gloucestershire has quite a few unconventional people living here, and for many years a currency has operated on a semi formal basis (including "bank statements"), known as "Stroud pounds". It is a fully functioning barter currency which allows for eachange of skills between members. It was the subject of a half hour programme on Radio 4 a while ago.
Of course, those who supplied services for barter in exchange for non business supplies would gain a tax advantage, and I did hear that the local tax office was showing an interest! I'm not sure how far this went, and thankfully have never acted for clients in the barter system, but the virtual money problem is a sophisticated devlopment of the same issue. Measuring and taxing "money" earned in different forms.